How M&As and partnerships can fuel digital transformation

While digital transformation offers opportunities for long-term business success, finding the right digitalization approach is critical.

In brief

• Successful digital transformation requires a strategic enterprise-wide approach, an innovative culture and a clear vision from the top management.
• M&As offer the opportunity to quickly acquire the right technologies and talent for digital transformation.
• While there are complexities in a digital ecosystem, joining it can potentially create new assets that can be monetized.

The COVID-19 pandemic has accelerated business transformation in ways not seen before. Beyond the surge in e-commerce and use of more online applications, digitalization has become a priority for businesses seeking to continue operations or enable remote working.

However, such digitalization efforts in pockets of the company are unlikely to address the larger imperative of achieving sustainable growth and profitability. Where the business needs to transform to work better, a coherent and cohesive digital strategy is needed. In other words, digital transformation is the means to business transformation.

A successful digital transformation requires an innovative culture and a clear vision from the top, which can then be translated into an actionable business strategy. Digital is and should be a part of the company’s DNA. Instead of having digital as an add-on, successful companies infuse digital capabilities throughout the business. However, the lack of digital talent is often one of the challenges that companies face.

As companies seek to level up their digital capabilities, leveraging M&A to acquire technology and talent for digital transformation is a viable approach. Acquisition has advantages in providing the speed and flexibility to capture emerging opportunities before the competition. However, there is also the risk of failure in post-merger integration. Additionally, for those acquiring start-ups, it is difficult to estimate the value of the start-up’s technology to arrive at the right price.

Corporates in Southeast Asia recognize the promise of digital transformation. However, many have yet to leverage opportunities in M&A to bolster technology acquisition, according to the 2020 EY Global Capital Confidence Barometer (pdf). Interestingly, the EY 2020 Global Corporate Divestment Study (pdf) found that as companies increase reliance on digital, divestment is becoming an attractive option to fund investments in digital.

Be clear on strategic vision and priorities

Establishing clear governance and leadership is essential for successful digital transformation. Many companies fail to take a strategic and focused approach, with numerous disparate groups within the company undertaking digitalization efforts in silos.

A strong CEO with a clear vision is critical for challenging traditional ways of viewing the industry and its competition, as well as overcoming entrenched ways of operating and allocating and prioritizing funding.

While transformation needs to be a strategic enterprise-wide approach, it can be extremely challenging to successfully execute a comprehensive and large-scale transformation across the entire company. Companies may therefore need to break the transformation project into smaller work streams, and prioritize the ones to focus on, without losing sight of the strategic vision. In identifying these priorities, companies will need to balance investing for growth and bringing down costs and driving profitability.

Importantly, in envisioning a business and digital transformation strategy, businesses should consider how it solves a real user need, as well as how to differentiate themselves with a unique technology platform, monetize data and create customer stickiness.

Being part of an ecosystem has its complexities too, due to difficulties in identifying the right ecosystem partner, balancing valuable insights with customer data privacy, overlaps in operations, and determining who owns the end-user relationship.

Companies should ask themselves if they want to become the platform where other players connect or join an existing ecosystem or platform orchestrated by another player.

First, companies need to understand the orchestrator opportunities available in their respective industries or regions. Not all companies can orchestrate an ecosystem; some must partner with the largest ecosystem or incumbent. The decision to build a platform or join an existing one should be taken after a comprehensive due diligence exercise.

Regardless, companies should increasingly keep an open mind in digital ecosystem thinking to keep their business strategy agile.

Boards and CEOs should ask the following questions:

• Do you have a holistic digital strategy that carefully considers buying versus building capabilities?
• What is your capital strategy to invest in digital and platform initiatives for the next two years?
• Do you have a clear long-term divestment strategy as part of your digital transformation?
• Are you making investments to build or tap into a digital ecosystem?
• How are you reviewing your operating model and integrating acquired digital assets to maximize value creation?

The pandemic highlights that those slower in the digital journey may perform well in the short term, but will find themselves on the back foot, or out of the race soon enough. Yet, simply incorporating digital technology into business processes is not enough. For continued success, companies need to critically review their business strategy, and assess how gaps can be overcome by organic investments, strategic alliances, or tapping into the broader digital ecosystem. Now is a good time to do so — with the pandemic comes uncertainty, but also opportunities for a first-mover advantage.